Sinking feeling about Botswana economy

SHARE | Thursday, 16 February 2017 | By Joel Konopo

Too many mines, too little to show for them – that is Botswana’s problem. Diamonds, copper, nickel – all have been hard hit by falling world resource prices, and for the first time since independence, the country historically seen as one of Africa’s success stories is confronting real economic decline. The $14-billion economy contracted by 1.7 percent in 2015, weighed down by persistent power and water cuts that disrupted factory production and would struggle to achieve 3 percent growth in 2016. Even rating agency S&P warned last month that Botswana faces a “deteriorating outlook” in 2017, suggesting a downgrade from A-/A-2 sovereign credit rating could be on the horizon. Domestic debt is still manageable. But from 6.3% in 2009, foreign debt has increased to 16% of GDP. For decades, Botswana has been praised as an “African tiger” that has avoided the resource curse – the corrosive effect of strategic mineral resources in promoting social divisions and kleptocratic elites. It has achieved an 85% literacy rate and 90% of children of primary age are enrolled at schools. Most HIV-positive citizens receive life-saving drugs. Official figures put unemployment at 19%, but the accelerating closure of mines and factories will likely push the figure higher. With 1000 of the 40 000 high school graduates entering the job market each year, youth unemployment now exceeds 40%.

A fifth of the country’s two million people live on less than $2 a day, and across the country the ranks of young and embittered are swelling. Government appears to be losing patience with dissenters. Take example of last year when a group of unemployed youth marched to Parliament demanding that government intervenes in creating jobs. Riot police suppressed them violently, with some journalists arrested. Mining has been the driving force of Botswana’s economy, helping the GDP to grow at an average of 7 percent a year for most of the 1990s. But price volatility, fueled by the cooling of the Chinese economy, and the growing haemorrhage of mining revenues to corrupt officials and businessmen, has weakened the sector. South Africa, the regional hegemon is flexing its economic muscles by introducing a new knife to cut the SACU cake. Revision of the SACU revenue sharing formula will see Botswana’s share declining significantly. SACU revenue has for a long time been second largest source of revenue after diamonds but imports within SACU region are dealing SACU cake a blow. Instead, finance minister, Kenneth Matambo is stepping up measures to hike taxes and cut spending to revive the weakening revenue base. Diamond sales – which contribute a third of the country’s GDP – have also lost their sparkle, declining by up to 30% in market value over two years, according to S&P report published in December 2015. At least six mines and “sightholders” – companies that turn rough stones into finished gemstones before selling them directly to jewelers such as Forevermark, Bvlgari Tiffany & Co – have gone out of business since 2011.

They include operations that closed in 2011 and 2016, leaving 600 workers without jobs. Australian copper junior miner Discovery Metals Limited filed for bankruptcy in 2014, leaving 450 workers near the Okavango Delta out in the cold while African Copper closed its operations at Mowana and Thakadu in central Botswana in 2016. On August 31 last year BCL – Botswana’s biggest copper and nickel mine - collapsed into bankruptcy after enduring three decades of losses. It was holed by a combination of ills; a global slump in commodity prices; clumsy, incompetent management; and political inertia. Owned 100 percent by government, BCL had P7-billion in debts and liabilities. BCL’s ore exports fell to a historic low of P374-million for the three months ending in October 2015, presumably because of a drop in global commodity prices and a change to its management. In 2014, Norilsk Nickel, offered to sell its operations in Africa to BCL for US$337-million. President Ian Khama took a knife to production plans immediately when Russians started demanding a P3-billion reimbursement, triggering a fall out and throwing more than 5000 miners out of jobs. In court papers seen by INK Centre, Norilsk CEO, Michael Marriot labeled Khama’s decision to liquidate the mine “deplorable.”

There are other challenges that contributed to Botswana dismal performance. Ebola scare kept many tourists away from Africa for most of 2015. Tourism contributes 12 percent to the GDP. Past errors weigh heavily, too, including Botswana’s failure to diversify its economy, particularly through coal exports and growing the financial services industry. With untapped reserves exceeding 200 billion tonnes, Botswana could become the world’s largest coal exporter to economies such as China. Yet red tape has stalled the construction of a 1 500 km railway link to Walvis Bay, which exporters would require. President Khama has made matters worse by introducing stringent new work permit regulations that are scaring away investors. Applying for a work permit has become onerous. As the new regulations such as the dreaded point-based system carried out existing foreign-owned businesses have alienated most Chinese investors who sought alternative investment destinations in Mozambique and Zambia. The productivity and competitiveness of business in Botswana are dismal, according to World Banks’ Ease of Doing Business report. It takes two weeks to register a company in Botswana and a day to do so in Rwanda. Moatlhodi Sebabole, economic researcher at First National Bank of Botswana, believes that job losses have accelerated financial pressures on ordinary households, which has in turn had a trickle-down effect on the economy. “Loss of jobs has resulted in pressure on the property market,” said Sebabole in a recent media interview. Even the commercial banking sector, considered more resilient than others, is seen by the central bank as “weakening” because of the general decline of the economy. The financial services sector contributes 11 percent to the GDP. At position 35 out of 176 countries, Botswana maintains its lofty position in Transparency International’s latest clean government rankings. But in tandem with economic decline, corruption is on the rise – critics point to a pervasive culture of impunity among high-ranking politicians and civil servants, particularly Khama’s allies.

“It’s our turn to eat,” said the former secretary general of the Botswana Democratic Party, Mpho Balopi remarked in 2013 to The Voice newspaper. The head of the country’s spy agency, Isaac Kgosi is accused of using his position to undermine efforts to investigate him. Khama’s younger brother, Tshekedi Khama, minister of tourism and conservation, has been accused of purchasing a luxurious Beechcraft King Air 350, worth P50-million at the taxpayer’s expense. Khama claimed the plane was for anti-poaching missions – despite objections by an aviation expert who said anonymously that the aircraft was not designed for such a purpose. Tshekedi Khama, who is seen as having presidential ambitions, has no patience with due process. He recently signed a P17-million tourism deal with little-known Dubai tourism company without involving key officials in his ministry – and was later forced to apologise. While his brother Ian was commander of Botswana Defence Force, he benefited from defence procurement, through his company, Seleka Springs. The president himself has an appetite for grand projects too. He recently ordered eight second-hand Gripen model “C” and “D” fighter jets worth P22-billion – almost half the country’s annual budget – that an aviation expert said the military neither needs nor can afford. Opposition parties have protested this but to no avail. In December 2015, when commodity slump began to bite, Government withdrew P3.5 billion from the Pula Fund, a stabilisation reserve created with diamond revenues, to create an economic stimulus package. Like any austerity, the money was supposed to be used to boost the economy at a time when demand for diamonds was at its lowest. Critics allege that the money was largely splashed on tenders for loyal BDP members. Many institutions set up to fight corruption have themselves been compromised. Opposition politicians say the Directorate on Corruption and Economic Crime (DCEC) is weak and lacks independence. “People believe leadership is corrupt, hence they become corrupt themselves,” said Umbrella for Democratic Change (UDC) party spokesperson, Moeti Mohwasa. But the real challenges may well be political. Botswana is a democracy along the lines of Japan, where a single party has dominated for decades, but that might be changing. The BDP’s popularity has been on the decline, hitting a record low of 47% in the 2014 election. Khama is barred by the Constitution from running again in 2019 and will be succeeded by an altogether duller figure; current BDP chair Mokgweetsi Masisi. He faces an increasingly energetic opposition bloc, the Umbrella for Democratic Change (UDC), under lawyer and human rights activist Duma Boko. If Boko defeats Masisi at the polls in in 2019, he will take the helm of a ship of state that seems to be heading steadily for the rocks.